Conveyancing Table of Contents
In this chapter.c1.Chapter 6 .c2.Taxation Aspects of Conveyancing Nonreciprocal Laws of Expectations: Negative expectations yield negative results. Positive expectations yield negative results.. .c3.1. Generally In these notes the complexity of revenue legislation cannot be reviewed however it is important to keep in mind a number of taxation aspects when advising on conveyancing matters. The other important matter to bear in mind is that these laws, particularly in the area of capital gains tax are constantly changing. In the area of capital gains tax the full ramifications are only just now being pursued. .c3.2. Stamp Duties (a) Generally The New South Wales State Government imposes stamp duty on instruments at different rates. A particular transaction may involve several instruments each liable to duty. A Schedule to the Stamp Duties Act, 1920 (N.S.W.) specifies the persons liable for the duty e.g.. purchasers, mortgagor, lessees. Stamp duty is payable within two months of when it is first executed by one of the parties1. After two months a fine of 20 % is payable, after three months a fine of 25 % and after four months a 100 % fine is payable. The Commissioner does have a discretion to remit fines however in only exceptional circumstances. Instruments executed in N.S.W. or affecting property in N.S.W. are liable to duty. It is an offence not to stamp an instrument and the instrument is inadmissible in evidence in civil proceedings, unless the producing party undertakes to the Court to stamp the instrument. (b) Stamping Contract and Assurance The purchaser's solicitor has a period of two months after first execution of the contract to have it stamped without penalty. First execution means the first time that an instrument is signed by any party thereto but in practice the Office of State Revenue will usually calculate the period for payment of duty on the contract from the date which it bears. If an instrument becomes ineffective it may be possible to obtain a refund of moneys paid for stamping. Duty on the contract is payable at the ad valorem rate set out in the Second Schedule to the Stamp Duties Act, 1920 (N.S.W.) and on the assurance , when made in conformity with an agreement on which ad valorem duty has been paid, at the fixed rate which is currently $ 2.00. Ordinarily the contract is lodged at the Office of State Revenue with an "urgent matters" requisition form and a solicitor's cheque or bank cheque for the amount of ad valorem duty, plus duty on the counter part (currently $ 2.00). A client's cheque is not ordinarily acceptable by the Office of State Revenue for urgent stamping. It is also possible to use a postal matters form. The usual practice is for the purchaser to prepare and execute the transfer and send the contract and transfer for stamping prior to submitting the transfer to the purchaser for execution. This enables the vendor to hand over a stamped and executed transfer on completion which is what will be required by the incoming mortgagee prior to handing over any funds on settlement. This is so that the mortgagee's solicitor will be in a position to lodge documents for registration immediately after settlement. The purchaser's solicitor may also wish to avoid delay in lodgment for registration. If the contract price for the purchase of the property2 with all inclusions does not exceed $ 155,000.003 the purchasers may come within the First Home Purchase - Stamp Duty Deferred Payment Scheme or be entitled to a 30 % reduction in the stamp duty payable. The deferred payment scheme allows a purchaser when buying his first home (not vacant land) to pay the ad valorem duty by annual instalments over a period of five years without interest except in the case of default. An agreement is entered into and the State Bank opens an account for the payment of the instalments and the first instalment is not payable until the anniversary of the stamping of the contract. The scheme is means tested. A single person must earn not more than $ 33,000.00 and a couple not more than $ 48,000.00 for the last financial year. A copy of the last Notice of Assessment of income tax must be attached to the application form. One person of a couple may qualify for the scheme even though the other person has had a house before. Department of Housing tenants are entitled to a complete exemption from stamp duty on their purchaser. An application form for exemption must be completed and a letter from the Department is often required to confirm that they are currently tenants. A contract for sale upon which stamp duty has not been paid is not only inadmissible in evidence4 but is of no effect at all unless and until the duty is paid, in which case the contract has effect as from the date of its ordinary operation5. Previously, in litigation to rely on a document meant that a party had to pay or undertake to pay stamp duty on a document on which stamp duty should have been paid by someone else. Since 1st January, 1991 anyone who is not primarily liable to pay stamp duty on an unstamped document may tender that document as evidence provided that they can show that they have informed or will inform the Office of State Revenue of the name of the person primarily liable and will lodge the instrument or a copy of it with the Office of State Revenue6. Importantly, they do not have to pay or undertake to pay the duty or penalties. (c) Pitfalls to Guard Against Double stamp duty will be payable in the following situations:- 1. A purchaser may have bought a holiday property with the intention of bringing in members of the family as co-purchasers, but had not decided at the time of purchase who would become involved. 2. A property may be bought in the name of a holding company with the intention that it would be held by one of a number of subsidiaries, but no decision had been made at the time of purchase as to which subsidiary would hold the property. 3. A purchaser may buy a property and between the time of the purchase and the time of settlement receive advice that the property be acquired in the name of a company, trust or partnership other than the original purchaser. However, in each of these examples it is possible for the original purchaser to achieve his intention by novation. However double stamp duty will be payable because novation involves two contracts, each of which is dutiable according to the Commissioner of Stamp Duties, even though the original contract is cancelled.7 The lesson to be learnt from this is that purchasers should make up their minds as to who or what person or entity is to be the long term holder of the property before it is bought. This may be more easily said than done. For example, the family home may be bought at auction by the husband/father. His name may be inserted int he contract as the sole purchaser, as his wife did not attend the auction. When he tries to borrow from his bank or building society, he finds that the loan will not be approved unless the property is bough in the joint names of himself and his wife. This is one of the few situations where Commissioner may not require double duty to be paid but only if the Commissioner can be satisfied that the property was purchased by the husband/father with the intention of purchasing it on behalf of himself and his wife. Another example of where double duty may be payable is where a father purchases a property using his own funds with the intention of holding it for his son. If he describes himself in the contract as "John Smith as trustee for James Smith" he will end up paying double stamp duty on the contract. This is because the words "as trustee for James Smith" amount to a declaration of trust8. Therefore the contract will be dutiable not only as a contract for sale but also as a declaration of trust liable to ad valorem duty payable on the value of the property held by the trust. This is unfortunate because it is possible for John Smith to purchase the property for his son without paying double duty. There is also a risk of double duty being payable where a purchaser is simply a "front" because, for instance, the real purchaser may not wish to be identified. Section 73(1)(e) of the Stamp Duties Act will permit the apparent purchaser to transfer the property to the real purchaser without paying ad valorem duty but only after the property has been "vested" in the apparent purchaser. Therefore after the registration of the transfer to the apparent purchaser the property can be transferred to the real purchaser if the Commissioner can be satisfied the real purchaser provided all the funds needed to acquire the property9. A risk of paying double duty also arises in the case of pre-incorporation contracts. To avoid double duty the property should be purchased "on behalf of X Pty. Limited a company yet to be formed" and the company named should in fact be formed (not just a shelf company). .c3.3. Capital Gains Tax (a) Generally Capital Gains Tax (CGT) is a fairly recent tax and its implications are only now becoming clear. There is considerable room for tax planning with regard to the choice of a purchaser, whether it is an individual, a company or trust. The options must be explored by the purchaser prior to entering the contract for sale, once contracts are exchanged, it is to late, and in the conveyancing context solicitors and real estate agents must be alive to the ramifications of CGT. CGT is a "transactional tax" and it is designed to tax the after-inflation or real gain arising on the disposal of assets acquired on or after the 20th September, 1985. The capital gain, if any, to be taxed will normally be the excess of the consideration in respect of the disposal of the asset over the indexed (or inflation adjusted) cost base of the asset10. In completing details concerning the price, thought should be given to apportioning the price between the land, buildings and items of plant and equipment depreciable for tax purposes, for the purposes of s. 160P and Part IIIA of the Income Tax Assessment Act, 1936. Land is generally acquired for CGT purposes at the time of the making of the contract, that is, the date of exchange of contracts11. (b) Pre-CGT Property Properties acquired before the 20th September, 1985 are not liable to CGT upon disposal. However there are limits to this. Where there is a replacement building or new building erected, for instance, there may be deemed to be a composite asset which must be separated on disposal into two or more separate assets e.g. the land on the one hand and the building on the other.12 If an option of pre-CGT property is exercised, the CGT legislation regards the option and the agreement for sale as all part of the one transaction an all moneys received by way of option fee and purchase moneys will be lumped together and received free of CGT. However, if the option is not exercised, the legislation regards the grant of the option as the disposal of a new asset and, because this new asset has been created and disposed of since the 20th September, 1985, it will be liable to CGT. If the option is not exercised the grantor will have to pay CGT on the option fee. A similar approach is taken to forfeited deposits. If a purchaser fails to complete a purchase and the deposit is forfeited to the vendor this deposit will be liable to CGT, even though the property may have been purchased before the 20th September, 1985. (c) Sole or Principal Place of Residence CGT is not payable on the principal private residence however there are technicalities associated with this exception. If a home owner is in the process of changing over the family home, and he buys the new property before he has sold the old property, the exemption can be enjoyed for both properties so long as the new home is acquired no more than three months before the disposal of the old home. Any period greater than this three months will be a period during which CGT will be payable on one of the properties. There is obviously good reason for a home owner in such circumstances not to take too much time in changing over homes. Another aspect of this exemption is that it only applies where the taxpayer is an individual. In other words, if the family home is purchased in the name of a company (even a company that is a trustee of a family trust) the exemption will not apply. A pitfall for home owners is to assume that the property they buy as their principal private residence will always be exempt form CGT and that no records need be kept as to its purchase price and other costs of acquisition, etc. The legislation requires records to be kept and although a property may be exempt when purchased the exemption may be lost in a number of circumstances. (d) Deceased Estates A dwelling disposed of within twelve months of the death of a deceased is exempt from CGT. The disposal may be by the trustee (carrying out his duties as a legal personal representative) or by the beneficiary after the dwelling has been transmitted to him either by the executor (if there is a will) or by the administrator (if there is no will). The exemption only applies in the case of a "dwelling"13 and it will not apply to other properties forming part of the estate. If the dwelling was acquired by the deceased after the 20th September, 1985, the exemption will only apply if it was the sole or principal place of residence of the deceased throughout its ownership by the deceased. (e) Forfeited Deposit Deposit money forfeited by the purchaser (under a contract or legislation) is liable to capital gains tax, in the same way as the fee for an unexercised option14. This will be the case whether or not the asset to which the contract and deposit related was exempt, would have been deemed not to create a gain or disposal (e.g. sole or principal residence) or would have involved a capital loss on disposal.15
1 Section 25 Stamp Duties Act, 1920. 2 Since the 1st October, 1990 "property" may include a house property or vacant land on which the first home will be built.. 3 As at 1st October, 1990 for a house property in Sydney Metropolitan area, $ 145,000.00 for property outside the Sydney Metropolitan area. For vacant land $ 80,000.00 and $ 70,000.00 respectively. 4 Section 29 Stamp Duties Act, 1920. 5 Ash Street Properties Pty. Ltd. v. Pollnow (1987) 9 N.S.W.L.R. 80 at 100. 6 Section 29(4) Stamp Duties Act, 1920 7 Revenue Ruling SD27. 8 Farrar's case (1975) 5 ATR 364. 9 Revenue Ruling SD120. 10 See ss. 160Z(1)(a), 160ZD & 160ZH of the Income Tax Assessment Act, 1936. 11 Ibid s. 160U(3). 12 Ibid s. 160P. 13 Ibid s. 160ZZQ(1). 14 Section 160ZZC(12). 15 An AAT case decided in July, 1995 may result in a reduced application of the section. In the case Bird v. Black, pseudonyms used by the AAT, the AAT found that the section did not apply to a deposit paid on a standard contract for sale of land.
